Earnings Call Transcript - RYAAY Q2 2023

Operator, Operator

Welcome to the Ryanair H1 FY '23 Results Conference Call. This call is being recorded. Today, I am pleased to present Michael O’Leary. Please begin your meeting.

Michael O’Leary, CEO

Good morning, everyone. Welcome to the Ryanair half-year results conference call. I'm here in London with part of the team, Eddie Wilson is in Dublin with another group, and Neil Sorahan is joining us from New York. I will go through the results and the management discussion and analysis to allow more time for questions. I encourage you to check out the slide presentation on our website. A few significant aspects from our performance post-COVID are evident. Slide 4 highlights the widening unit cost gap, excluding fuel, between us and other European airlines. We entered COVID with a unit cost of €31, which has decreased to just under €30, while nearly all our EU competitors have higher ex-fuel unit costs, creating a significant gap. This might explain our robust recovery. This summer, we operated at 115% of pre-COVID capacity. Although first-quarter fares were impacted by the Ukrainian invasion affecting Easter travel, we saw traffic growth of 11% to 12% and a 15% increase in capacity in the second quarter, with average fares rising 14%. While we don't expect this trend to continue into winter, we are pleasantly surprised by the strong forward bookings for the third quarter. October was strong, and Christmas appears promising in terms of both volume and average fare, with this weekend's bookings surpassing those of last weekend despite concerns surrounding recession and inflation. Currently, we're witnessing three factors: increased bookings with Ryanair due to our reliable service, growth in capacity as we gain market share with new, fuel-efficient aircraft even while competitors cut back, and our significantly lower fares compared to the competition. If this trend persists through winter, we could experience a very strong season. However, we still forecast potential losses between €100 million and €200 million this winter due to ongoing challenges, despite our strong first half. If we can navigate through winter with strong growth, roughly 10% compared to pre-COVID figures and reasonable pricing without disruptions from COVID or Ukraine, we hope to be near the lower end of that projected loss. This would position us favorably for summer 2023, particularly with the anticipated recovery of Asian traffic and strong Transatlantic demand given the dollar's strength. The strong dollar may result in more families choosing to vacation in Europe. We foresee potential for a solid year in 2023, particularly if Asian traffic returns, and we expect fare growth in the mid to high single digits, which would help mitigate rising oil prices. We remain cautiously optimistic for the second half of the year, noting last year's unexpected challenges with Omicron and the Ukraine invasion, which affected our traffic. Most competitors face staffing challenges and have not returned to their pre-COVID capacity levels, with the exception of a smaller Hungarian airline that has not consistently maintained their announced capacity. Ryanair, however, remains well-managed in terms of fuel hedging and overall market positioning. We are proud of our recovery and recognize our team's contributions. We've communicated with our union partners regarding the timing of pay restorations, moving it from April 2023 to December 2022. The majority of our pilots and cabin crew will see their pay fully restored by the Christmas payroll. While smaller unions, including the Belgian and Irish pilots, have yet to agree to similar terms, we hope for their cooperation. Another challenge we face is with Boeing, as we expect to receive 51 aircraft by the end of April but anticipate receiving only 40 to 45 by the end of June, which could still allow us to meet our FY 2024 passenger target of 185 million. Though there are concerns about higher oil prices, we've hedged 50% of our fuel costs at $93 per barrel. If there are no negative developments regarding COVID and Ukraine this winter, we believe fares may modestly increase as demand remains strong and capacity is still below pre-COVID levels. Overall, we've restored our guidance, projecting a full year profit after tax between €1 billion and €1.2 billion, close to our pre-COVID levels. This confidence allows us to proceed with pay restoration before Christmas, though we need to remain cautious regarding any potential news that could impact our operations. Nonetheless, Ryanair, along with our management and staff, has demonstrated a quicker and stronger recovery than any other airline in Europe, and we expect this trend to continue. Neil, would you like to add some insights on the balance sheet, currency hedging, and capital expenditure?

Neil Sorahan, CFO

The balance sheet has shown strong performance. We ended the quarter with €4.6 billion in cash. Notably, net debt decreased from €1.5 billion to just over €0.5 billion, even with nearly €1 billion in capital expenditures during the first half of the year. As Michael mentioned, we are in a robust position regarding hedging, especially with capital expenditures hedged at the end of the order book at €1.24, which is very favorable compared to current market swaps. We are also 87% hedged at just under $70 a barrel for the second half of the year, with a well-hedged rate of 1.15 on the euro/dollar for the remaining financial year, and about 20% hedged on euro/dollar at 1.08 into next year, additionally hedging 50% of our jet fuel at around $93 a barrel. It’s worth mentioning that we own all of our 737 aircraft outright, and in this rising interest rate environment where lease rates are increasing, we will avoid the challenges faced by other airlines, which will benefit our cost structure in the coming years. That's all I wanted to add.

Michael O’Leary, CEO

Okay, that's fine. And Eddie, maybe you want to give us a quick couple of lines on the outlook for growth into this winter and into next summer?

Edward Wilson, CRO

Yes, we plan to grow close to 10% this winter, unlike our competitors. There are plenty of opportunities available. We have secured long-term low-cost agreements with our major hubs in Stansted, Charlotte, and Bergamo, and we continue to take advantage of lower costs at airports. These airports represent an increasingly smaller portion of our overall airport network. If there are cost increases, there won't be any capacity growth at all. We have a strong pipeline of new personnel, including pilots and cabin crew, to support that growth in the coming years. As Michael mentioned, fares have been robust this weekend, largely due to reduced capacity from our competitors. Additionally, I believe our reliability story in the U.K. over the past week, along with extended deals in Birmingham, is positively influencing bookings.

Darrell Hughes, Head of People

Yes, everything has gone quite well. We updated the unions. The main challenge we face is that we are currently discussing pay deals that were deferred from late April for the next two to three years, extending into 2026 and in some cases 2027. We were able to implement pay increases earlier than expected, which typically would have been reviewed in April. Given our strong operational performance, we believe it is appropriate to fully restore pay for all our employees despite some uncertainties for the winter. Michael has already mentioned the two countries where this still needs to happen. I am fairly confident we can achieve this at the same level and reach 100%, but that depends on the two unions involved. There is a level of predictability regarding pay over the next three to four years. Overall, the unions responded very positively. The shift of payroll from April to Christmas was particularly welcomed.

Michael O’Leary, CEO

Good. Okay, all right. With that, let's open up to Q&A, please. We're tight for time, so we have to finish by around 11:00 or just after, as some people have to attend meetings, but let's keep it as concise as we can.

Operator, Operator

Thank you. Our first question comes from the line of Jaime Rowbotham at Deutsche Bank.

Jaime Rowbotham, Analyst

Two for me. Firstly, on the non-fuel unit costs. The move on pay restoration is clearly a commendable one. Can you give us a rough estimate of the incremental cost to Ryanair of bringing that forward? Clearly, you've had to bake something into your full year guidance for this. And perhaps you could tell us where you think it leaves you on non-fuel unit costs for the year to March '24? Second question, Michael, you mentioned fares could still be up next summer potentially offsetting fuel, if that stays high. Do you mean fares up year-on-year next summer or still up versus pre-crisis? And within that, any areas where the supply-demand imbalance is giving you particular confidence or areas where you’re less confident?

Michael O’Leary, CEO

I will handle the fares, Neil, and perhaps you can take care of the non-fuel unit costs.

Neil Sorahan, CFO

Sure, yes.

Michael O’Leary, CEO

Regarding fares, we are in a phase of speculation, but I am confident that we are in a unique situation. Looking at our competitors' capacity cuts this winter, we see Lufthansa operating at 80% of pre-COVID levels, IAG at 87%, AF at 85%, and easyJet at 90%. Many airlines are significantly unhedged for fuel this winter, and with rising oil costs, it makes sense for them to cut capacity. The days of aggressively pursuing growth are behind us, as management in European airlines is acting more sensibly. Even Wizz is redirecting its growth to the Middle East to avoid competition with Ryanair, which I believe is a smart move. If we experience a winter with reduced short-haul capacity in Europe, operating at 80% to 85% of pre-COVID levels while Ryanair operates at 110% with load factors in the low 90s, there will likely be an opportunity for fares to increase next summer. Year-on-year, not compared to pre-crisis levels, fares are already above pre-COVID rates, and I anticipate a further rise in the mid to high single digits through next summer. This is driven in part by Easter falling in Q1 next year, providing a strong start to the year. I foresee continued strong demand for holidays with families traveling abroad in Europe next summer, and hopefully, the recovery of Asian travel will support short-haul traffic on legacy carriers. The Transatlantic market remains robust. Despite some short-term worries about inflation or recession, it’s still challenging to book restaurants or hotels in major European cities, reflecting full employment and consumer spending. This Christmas should be strong, and if we have Easter in Q1 along with a robust second quarter, it is reasonable to expect significant upward pressure on airfares in the first half of next year, especially if jet fuel prices remain around $110 a barrel, amidst a recovery in less than pre-COVID capacity across Europe by December 2023. As long as there aren’t any setbacks with COVID or the situation in Ukraine this winter, I believe the positive trends we’ve seen this summer and into the third quarter will persist into the fourth quarter and the early part of next year. Neil, would you like to discuss the developments in non-fuel unit costs?

Neil Sorahan, CFO

Yes, sure. Jamie, I'm not going to give exact figures around what the payroll is going to be over the second half of the year. But we've previously guided that unit cost ex-fuel will be approximately €31 in the current financial year. We're not deviating away from that. We see slightly lower load factors into the second half of the year and we'll see that step up on the staff cost, the route charges. But we're sticking to that €31. If we get the extra Gamechangers into the fleet next year, we hope to start seeing unit costs, ex-fuel coming down again.

Michael O’Leary, CEO

Next question, please?

Operator, Operator

That comes from the line of Alex Irving at Bernstein.

Alex Irving, Analyst

Two for me, please. So first of all, digging in on staff cost a little bit. I thought that your unit staff cost went up between our Q1 and our Q2, even as productivity rose. It looks like it was about €5.60 in Q1 and €6 in Q2. I’m wondering what’s behind this? Were you rostering extra hours this summer to handle potential ATC delays? Is it a change in pay levels? Is there something else? My second question for you is, I...

Michael O’Leary, CEO

Yes, second part?

Alex Irving, Analyst

It appears that we are entering a new phase of steady growth in the low single-digits annually. Do you have the potential to boost this growth by adjusting prices closer to inflation or by launching new products? What is the future opportunity in this area?

Michael O’Leary, CEO

Sorry, Alex. I just wanted Neil to answer for the second question. Can you just repeat the second question, please?

Alex Irving, Analyst

On ancillaries, what growth opportunity do you have going forward? It looks like we’re starting to normalize at a low single-digit growth per passenger per annum.

Michael O’Leary, CEO

Okay. Neil, you start and I'll do the ancillaries.

Neil Sorahan, CFO

Okay. Yes, sure. On the staff, there are a number of factors there. Yes, we were ramping up as aircrafts came in. We also have seen the likes of the payroll support rolling off and the start of pay restoration, which we’d agreed with people starting to kick in over the course of the summer. So it was a combination of all of that which led to the increase and obviously, increased activity, increased sector pay for people. And then, of course, we’ll now have the full pay restoration, the balance of it coming into the second half of the year.

Michael O’Leary, CEO

Regarding ancillaries, I agree with you. We anticipate it to normalize now, projecting a low single-digit growth per passenger. We're continuing to see conversions on major items like priority boarding and reserved seating, and we're starting to manage yields in that area with some success. Although there's still a strong recovery, there's additional potential for in-flight sales, especially in terms of duty-free on 40% of flights to and from the U.K. We're facing challenges with supply issues from some bar and duty-free providers, making availability inconsistent. This winter, we plan to address labor staffing at our in-flight suppliers to ensure a more dependable delivery of duty-free products. We've experienced many sellouts and stock-outs with certain items. Therefore, while there's room for improvement, it's reasonable to expect modest low single-digit growth in ancillaries per passenger over the next two to three years. Next question, please?

Operator, Operator

That comes from the line of Savanthi Syth of Raymond James.

Savanthi Syth, Analyst

Can you share your expectations for capacity growth in fiscal year '24? You mentioned that you believe you can reach €185 million if there are 5 to 10 MAX delays. Does that imply you have a specific range for next year, or is there a plan in place to achieve utilization that would allow you to reach that target? Additionally, beyond the strong demand, are you noticing any new booking trends reflected in your numbers, or is the situation simply characterized by low capacity and high demand, as you indicated?

Michael O’Leary, CEO

Let me start with the second question first. There are a few new trends we've observed, but we're uncertain about their sustainability. Firstly, we've gained a larger market share in several European markets, particularly in Spain, Italy, Ireland, and the U.K., where we are experiencing strong growth, especially in the provinces. We're noticing an increase in off-peak demand and pricing in these domestic markets, which are not reliant on leisure traffic but rather consistent year-round travelers. This is particularly evident in Italy, where Alitalia and Wizz are withdrawing from the market. In Vienna, where Wizz has also retreated, we see significant growth as well. We believe this trend will persist. In the short term, we are benefiting from a strong reliability this summer, which has enhanced our reputation as a reliable provider while competitors are reducing their capacity significantly this winter, even as we are expanding ours. It’s possible that some consumers are starting to feel anxious about a recession and inflation, leading them to gravitate toward the lowest-cost provider, which in Europe is Ryanair, similar to the IKEA or Lidl effect. While we are surprised by the robust strength of bookings and pricing since the peak summer season, we anticipate a slight decline or the need for more aggressive pricing through September and into October and November. Although we haven’t initiated any major seat promotions, we remain cautious. Negative developments like new variants of COVID-19 or geopolitical tensions could quickly alter the situation. If we can navigate through to spring without setbacks, we might experience a solid second half of the year, but we should maintain caution instead of optimism. Regarding summer 2024 capacity, if Boeing delivers 40 to 45 aircraft rather than 51, we should still reach approximately 185 million passengers. We expect to enhance aircraft utilization slightly and have secured a low-cost long-term lease for an additional aircraft we previously operated. It's likely that our load factor will improve by around 1% next summer. We will not stretch ourselves excessively to achieve 185 million passengers. If aircraft availability falls short, we may have to adjust our expectations to around 182 to 184 million passengers. Our focus will be on recovery and continuing to carry passengers across Europe, especially during peak periods such as the first quarter and Easter in the second quarter. We don’t expect airfares to rise to double digits, but mid to high single-digit increases seem reasonable next year, assuming no adverse external factors arise. With the timing of Boeing's aircraft deliveries, increased utilization, and a slight uptick in load factor, we could still aim to grow from 168 million passengers this year to 185 million next year. Next question, please?

Operator, Operator

That's from James Hollins at BNP Paribas.

James Hollins, Analyst

One for you, one for Neil. Neil, it seems clear from your earlier video that you plan to use cash to repay the volumes over the next nine months. I’m curious about your thoughts on the appropriate liquidity level for Ryanair as we move past COVID, and am I correct in understanding that it will be cash rather than refinancing? Michael, you mentioned in your video that you're aiming for 110% capacity this winter, but you also suggested there might be scheduling and productivity improvements with higher capacity on weekends and relatively flat capacity during weekdays. Could you update us on that?

Michael O’Leary, CEO

Neil, you can start with the first question, then Eddie will take the second one regarding winter. I might also ask Jason, who is here, to provide some commentary on that. So Neil, what are the planned uses of cash?

Neil Sorahan, CFO

Well, the use of cash for the next 12 to 18 months will be for paying down those bonds and the CapEx. If there is an opportunity in the market to do something at very low levels, we will look at it, but the working assumption is very much that we will use the cash. We want to get down to that net 0 debt position by the end of next year. We still like holding a fair bit of cash on the balance sheet, the €4.6 billion at the end of September. I’m not sure if it needs to be €4.6 billion at this stage, but it’s important to have somewhere between kind of €3.5 billion to €4 billion on a long-term basis, in case you get hit by further shocks over the next number of years.

Michael O’Leary, CEO

I want to point out that of the €4.6 billion, €1.6 billion is designated for debt repayment next year, and we're currently at peak capital expenditures, spending about €2 billion annually. We do not have €4.6 billion just sitting idle; we have specific uses for it. However, we have the chance to pay down bonds next year that are funded at 1.2% and 1.5%. If we were to refinance now, we would be looking at rates of 5% or 6%. Therefore, as an airline, it makes sense for us to pay down debt, while our competitors might be considering additional equity raises or refinancing in a significantly unfavorable debt market. It is more prudent for us to utilize the cash to reduce our debt. Eddie?

Edward Wilson, CRO

Yes. I believe there are two key points to consider. Regarding our utilization, while we made some improvements, a lot has been impacted by our operational challenges, especially in light of ATC. We recognize that some of our capacity was consumed by these issues. However, during the winter, we managed to enhance our utilization of the aircraft. Additionally, we saw a growth of a few percentage points compared to our performance in 2018, particularly with the distribution of flights on Tuesdays and Wednesdays and maximizing aircraft usage on weekends, which tend to yield higher returns. This adjustment has allowed us to achieve better utilization during the winter and facilitate a transition from mid-week flights to weekend operations.

Michael O’Leary, CEO

And it also helps crew utilization. We're still getting good crew utilization by flying people over four or five days of duties across weekends rather than having them sitting around on Tuesdays and Wednesdays rostered home standby. So generally speaking, more efficient. We couldn't do that if we were having a big land grab or capacity wars with other airlines. But the fact is that all the others cut back this winter and we grow, gives us the latitude to kind of target our growth on the days of the week or the weekends when people want to fly rather than just having to be very aggressive on capacity and pricing in the middle of the week. Again, we would hope that that will translate into a better than forecast performance in the third and fourth quarters. But again, caution, fourth quarter, no Easter and the third and fourth quarters are hugely exposed to any adverse negativity on COVID or Ukraine.

Operator, Operator

That's from Stephen Furlong of Davy.

Stephen Furlong, Analyst

Just go through again Slide 4 there in terms of the ex-fuel cost, in terms of where you see a big team, of course, inflation of the cost base across not just this sector but other sectors. So that's not happening in Ryanair. Just go through that again. And then secondly, on Boeing, just talking then about your relationship there, how is it going? What are they doing? Or is the U.S. airlines, for example, calling for some resolution on the MAX 10 in terms of what's happening there?

Michael O’Leary, CEO

If you look at Slide 4, we've updated our analysis based on the recent half-year results of our main competitor airlines. There has been a significant increase in the gap in unit costs. Historically, we have been much more efficient than other airlines, and our airport and handling costs are substantially lower. Our ownership and maintenance costs are significantly less than those of Wizz, easyJet, and even Southwest in the U.S. This gap has widened considerably during the COVID period. As we came out of COVID, we benefited from sensible pay agreements that allowed us to retain our employees. Some competitors faced staffing shortages this year, leading to panic pay increases and offers to attract new hires. We have successfully negotiated sensible extensions of long-term growth and traffic recovery deals at airports, unlike many competitors who are dependent on monopolistic airports where they have no pricing power. We've been proactive in managing our operations and have closed bases this summer, including Frankfurt Main and Brussels, in response to rising costs during periods of declining traffic. We're maintaining discipline with our major bases, such as Stansted and Bergamo, extending our traffic growth agreements through to 2028, 2029, and 2030. Our ownership and maintenance costs will likely be a significant advantage for us post-COVID. We own the majority of our fleet, with 90% unencumbered, which allowed us to avoid lease payments during COVID. Many of our competitors emerged from the pandemic owning little of their fleets and are now reliant on costly operating leases, especially as interest rates increase. This could push their costs above €50, or even €60 or €70, ex-fuel, while we may remain in the low €30s. This gives us considerable room to expand our capacity while possibly raising fares modestly to cover unit costs, providing us with a better position than our competitors. Regarding our relationship with Boeing, it’s currently challenging. We acknowledge the difficulties in their production facilities and have accepted that we won't receive the originally contracted 51 aircraft by the end of April. However, if we can get 40 to 45 aircraft by the end of June, we can still meet our ambitious traffic growth projections for FY ’24. We are discussing new aircraft options with them, and we support Boeing in seeking an extension for the MAX 10 certification. It's essential for operational consistency that the cockpits of the different MAX models remain similar; we do not want pilot training to become unnecessarily complex. We are not close to an agreement on pricing for new aircraft at this time, and we do not require new aircraft until 2026. We prefer to receive the aircraft over receiving compensation for delays, as this would better support our revenue growth. The relationship with Boeing has been stagnant due to their ongoing delivery issues, but we recognize the necessity to collaborate with them to facilitate deliveries. We may even supply some spare parts to help expedite the delivery of our aircraft. Our target remains to have 40 or 45 aircraft by the end of June 2023 to help us reach our traffic goal of 185 million for FY ’24. If we fall short, we expect to see some benefits in fares and yields. Next question, please?

Operator, Operator

That comes from the line of Sathish Sivakumar of Citigroup.

Sathish Sivakumar, Analyst

I have two questions. First, regarding working capital in Q3 and Q4, will it return to the seasonality levels we experienced before the pandemic, or is there anything we should consider for the second half of the year? Secondly, about the Italian market, given that you have gained market share there, are you noticing improved pricing power, specifically that pricing in both the domestic and intra-Europe parts of Italy is outperforming your overall network? Any insights on that would be appreciated.

Michael O’Leary, CEO

I'll hand the working capital question over to Neil Sorahan. Additionally, John Norton from the treasury team may share some insights regarding the Italian market. Eddie, I would like you to start off, and then I'll have Jason provide a few comments afterward. So, Neil?

Neil Sorahan, CFO

On the working capital, bookings are still a bit closer than they would have been pre-COVID. This means at this time of the year when our cash would normally be dropping back, it’s not dropping back as extremely. In fact, as Michael has said, bookings are already strong open to Christmas. Very limited visibility into Q4. But barring any COVID shocks or towards geopolitical events, we would hope that we’ll start to see a more normalized booking curve at that stage with people starting coming back in January and February and booking their Easter and their summer holidays at that point in time. But it’s a little bit too soon to say that we’re seeing that, yes, with limit visibility to Q4 at this point in time.

John Norton, Treasury Team

Just liquidity is still proving very strong today. As we build into Q1 during the January period, we start seeing the bookings for the summer and the cash starting to come back as part of the cycle for Q3.

Edward Wilson, CRO

Yes, I believe that in the Italian market, especially after COVID, there has been an influx of activity at Italian airports. We are working to address the capacity gaps, except for Ryanair, where we may have acted too soon. This has resulted in increased flight frequencies and improved schedules, leading to some pricing pressure on certain routes, although the domestic market remains very competitive. We have noticed this competition on routes we operate and over the years we have seen significant changes on some core routes. Recently, we have achieved some successes on various routes and are now reducing our presence in places like Palermo on those domestic routes. This reduced activity will likely result in higher pricing in the medium term.

Jason McGuinness, Head of Commercial

Yes. We're very happy with the Italian market. Load factors are very strong across this summer and into winter. We're operating some well over 600 routes, 100 of those are domestic routes. Our overall market share is 40%, but we're probably closer to 50% on the domestic market, and we're by far and away the number two airline in Italy. easyJet is on 12%. So we're by far and away the dominant carrier in Italy. I'm very happy with how the market is performing at the moment. Particularly in off-season, we see that very strong domestic traffic continues and we are continuing to see competitors cut capacity be it ways and we would like to roll in Catania, accounting that route. easyJet pulling back in Dennis and Naples. So we’re very happy with the Italian market and the growth that we’ve put in there over the last two years.

Michael O’Leary, CEO

And we plan to grow there again next year. Next question, please?

Operator, Operator

That's from the line of Muneeba Kayani at Bank of America.

Muneeba Kayani, Analyst

So just a clarification on fares mid-single-digit to high single-digit in the year. So how much of that is based on the bookings you're seeing? Or is that what you're seeing in bookings right now? Or is that your kind of assumption for the year? That's my first question. And then secondly, fuel hedging on Slide 18. The disclosure is different from what you had before which had caps and stocks broken out. So have you changed your strategy here?

Michael O’Leary, CEO

I'll let you handle the fuel hedging, Neil. I'm not going to provide any further guidance or breakdown of our current situation. We believe it is reasonable to expect mid to high single-digit growth in fares and yields for the full year. Currently, we are experiencing better results than that, but we are uncertain if this trend will continue through Christmas and into the fourth quarter. We remain cautious about the possibility that an unfavorable COVID or Ukraine situation could disrupt things. We are acutely aware of the events from last November and February, which abruptly hindered what appeared to be a robust post-COVID recovery. Therefore, forecasting mid to high single-digit growth for the entire year seems optimistic enough for us. We prefer not to be overly optimistic beyond that. However, if there is any risk, it may lean towards the upside. And Neil, how about the fuel slide?

Neil Sorahan, CFO

Yes, Muneeba, there hasn't been any significant change. We haven't added anything meaningful, and in fact, we haven't increased our caps at all, many of which have already been exercised. If it's helpful, we can give you the blended jet figure knowing that we will exercise the remaining caps, which is why we're seeing 87% at around $700 per metric ton. We're continuing to hedge jet as our primary focus, and for the upcoming year, we're only utilizing jet swaps at this time for $900 to $930 per metric ton. This should help simplify things for you and other analysts who have had difficulty distinguishing between the caps and the jet in the past.

Michael O’Leary, CEO

It's reasonable that someone asked me this morning why we are not more hedged for next year. We have genuine concerns about the upcoming year. I believe that a 50% hedge is a sensible approach. There are significant risks on both the downside and upside for oil as we move into next summer. If the recession is as severe as the Bank of England predicts and if China continues facing challenges with COVID and economic demand, plus if Shell significantly increases its rigs, oil prices could drop by next spring or summer if the situation in Ukraine resolves. Therefore, we prefer to maintain our current position. A 50% hedge for next year is sufficient, and we'll assess the fuel prices as they rise or fall into next summer. If geopolitical conditions stabilize and oil prices increase, we will still have hedged 50%. Conversely, we face challenges because our competitors have weaker hedges compared to ours. We don't want to be hedged at 100% or 90% at $92 a barrel while they benefit from lower oil prices in a declining market. I believe our hedging strategy is sensible, taking into account the equal risks on both sides for oil next year. The key difference is that we are among the few airlines with a strong balance sheet capable of hedging fully against both the dollar and oil. Next question, please?

Operator, Operator

And that comes from the line of Mark Simpson at Goodbody.

Mark Simpson, Analyst

Two questions. One, I’m just wondering within the target of 0 net debt by March ‘24, what’s the assumption of the unearned revenues within that? Obviously, back in, say, 2019, it was at €1.9 billion. So I’m wondering if there is sort of guidance around that? And on the ancillary, one of the good things we saw Q-on-Q was another step-up in the ancillary per pax number. With better loads anticipated over the next 18 months, can we expect further leverage on that ancillary per pax performance?

Michael O’Leary, CEO

I want to clarify both points. We have set a target to achieve zero net debt by the end of fiscal year 2024 and plan to pay down €1.6 billion in bonds. Most of next year's capital expenditures will be funded through our own cash flows. However, we won’t provide specific guidance on individual components. Assuming a return to normal conditions without negative impacts from COVID or the situation in Ukraine, we anticipate unearned revenues will rise back to pre-COVID levels. Regarding ancillary revenue per passenger, we expect modest low single-digit growth over the next year or two, possibly increasing by around 1% during peak summer. This growth isn't significant, but we believe there is some potential for improvement in conversions and yield management. The resurgence of duty-free sales for flights to and from the U.K. will definitely contribute to our ancillary revenue next year, which is a prominent topic as many airports report significant recovery in retail and commercial income due to the reinstatement of duty-free sales for U.K. services. While the U.K. government continues to search for advantages stemming from Brexit, the recovery in duty-free sales for airports and airlines related to U.K. routes has been one of the few benefits of Brexit. Next question, please?

Mark Simpson, Analyst

And just want to follow-up, I think. The reason I’m asking that is just the application of dynamic pricing on ancillary. I’m wondering if there’s anything you can tell us about that within the lapse projects?

Michael O’Leary, CEO

Not really. I mean, we're working on it but I don't want to overpromise here. We're continuing to work on conversion, yield management and there's a little bit of dynamic pricing. But unlike many of our competitors who are promising the data, would provide everything that the future lays ahead of us, we'd rather deliver first and we'll talk about it later. Next question, please?

Operator, Operator

That comes from the line of Jarrod Castle at UBS.

Jarrod Castle, Analyst

I would like to clarify the first question if that’s alright. The inquiry was regarding the pricing situation. You mentioned in the release that most of your summer inventory is currently on sale. Could you provide any insights related to summer? Additionally, is there a concern about a potential mismatch between your current summer sales and your fuel hedges? For instance, what would happen if fuel prices unexpectedly rise and you’ve based your sales on current prices for the summer? The second question pertains to your interest in M&A, particularly since your company has not engaged much in this area historically. I would like to know your perspective on the current landscape regarding M&A.

Michael O’Leary, CEO

At this point, we have approximately 80% to 90% of our summer '23 sales completed. However, forward bookings are expected to decline slightly in the low single digits, around 1% to 2% of seats sold for the summer months of next year. While fuel prices could impact us, we have already hedged 50% of our fuel at $93 a barrel, while current spot prices are around $110, so we are still managing to save money in that area. Our competitors will likely face greater volatility with fuel prices compared to us because we can take long-term positions in fuel hedging thanks to our strong financial standing. Our concern is more about the situation where we hedge too much fuel at a higher price, only to see spot prices drop significantly. We aim to hedge half of our fuel bill for next year, and if prices increase, we’ll be protected by our hedges, while if they decrease, we will benefit from the lower costs. We're not trying to outperform the market with our hedging strategies, but rather to minimize volatility. I believe that fares next year will be influenced more by responsible capacity management this winter, a trend that seems to be continuing. I must note that Q4 will be challenging due to the absence of Easter, but Q1 will benefit from a full Easter, which will likely lead to a strong Q2, driven by Transatlantic visitors arriving in Europe with a strong dollar, as well as the return of Asian visitors and Europeans continuing to travel. Even in the face of a recession and rising prices, travel bookings for next summer are robust, with better flight and accommodation bookings in Europe compared to this year, and we are already ahead of pre-COVID numbers. While there might be some discrepancies, overall, I am confident in our positioning and believe that any potential mismatch would likely work to our advantage. Regarding M&A, we have ample organic growth opportunities that will allow us to reach 225 million passengers a year over the next five years, and we do not foresee engaging in M&A activities. Although others in the industry may face challenges in M&A, we could assist them in navigating competitive issues, particularly regarding revenue competition. It’s interesting to see that IAG, Lufthansa, and Air France KLM are beginning to discuss M&A again, with all expressing interest in carriers like TAP and Alitalia. Both airlines are well-managed but are operating within a mid-cost space, making it difficult for them to compete with our pricing and cost structure. EasyJet has established a strong presence in higher-cost airports but is retreating from markets in Italy and Portugal where they struggle against us. Similarly, Wizz is increasingly facing competition from our operations in Central and Eastern Europe. While they have expanded into Vienna and Italy, they find it hard to compete where our costs are lower. Their strategy to expand into the Middle East seems sensible, and they may find financing opportunities as they grow their presence there. Overall, the industry seems to be acting rationally, and consolidation in Europe seems inevitable in the next three to five years, with airlines like Alitalia and TAP likely to be absorbed as they cannot maintain their current status. It seems more plausible that Wizz and EasyJet will engage in the M&A process as Europe moves toward a market structure similar to North America, with a couple of larger higher-cost carriers and one major low-cost operator. However, in Europe, our low-cost carrier will offer significantly lower fares than Southwest in the U.S. We are currently in this ongoing transformation, and while some may disagree, I have anticipated this shift for years. COVID-19 and other disruptions may have delayed it, but the eventual outcome seems inevitable. Next question, please?

Operator, Operator

That comes from the line of Johannes Braun at Stifel.

Johannes Braun, Analyst

Two questions from me also. Firstly, if I did the math right, I think free cash flow was slightly negative in Q2, which I think would also explain why net debt is slightly up to the €0.5 billion from the €0.4 billion that you reported at the end of Q1. I think that’s a little bit at odds with other European carriers that still reported positive free cash flow for the quarter. I can see your CapEx was €500 million in Q2, slightly higher than Q1. But any other reason why free cash flow was negative for you? Is it maybe the working capital impact from the slightly weaker yield growth that you expect for the winter versus the last quarter? And then secondly, the pay deals that you mentioned which were prolonged until, I think, 2026 or even 2027. Can you just remind us what the pay deals imply? My last information was that it’s a 2% to 3% wage increase per annum, but is this still the case?

Michael O’Leary, CEO

That's correct regarding the pay deals. There was a restoration in April '23 and '24, which has now been moved up to December '22, followed by a secured pay increase of 2% to 3% per year. Neil, I'm not quite sure where you're coming from with the negative cash flow.

Neil Sorahan, CFO

Well, the prime reason for the difference is, Johannes, first that we have extended the '18, '20 leases now to 2028. Under accounting rules, IFRS 16, we have to capitalize or take the extra years of the deemed debt onto the balance sheet. So it's that kind of notional debt on leases that makes up the delta that you're trying to reconcile there.

Michael O’Leary, CEO

I will say the strength of the balance sheet, that we’ve reduced the net debt from €1.45 billion to €0.5 billion over the half year. I would not recognize your presentation there in terms of negative cash flow or declining yields, if everything is the opposite. But it is what it is. Next question, please?

Operator, Operator

That's from the line of Gowers at JPMorgan.

Unidentified Analyst, Analyst

Just two quick ones, if I can add. I mean, first one, just on the visibility post-Christmas, now you can give us an insight on what percentage of Jan to March is good currently? Is that very different from what you would expect at this point pre-COVID? And then just second quick one, any difference in bookings between the U.K. in terms of point of sale versus Continental Europe currently operating equal pattern in terms of demand?

Michael O’Leary, CEO

Yes, I'll do go forward. Eddie, you can do the U.K.

Edward Wilson, CRO

Yes.

Michael O’Leary, CEO

Currently, from January to March, we have sold just under 10% of the available seats. This figure is slightly lower than what we would typically see in previous years. One factor contributing to this is that Easter has shifted to April this year, and we lack visibility for Q4. Bookings are limited, and the profile is a bit behind our pre-COVID levels. However, the U.K. market is showing remarkable strength, especially in outbound travel to Europe, short-haul weekend trips, and business travel. Eddie, do you have anything to add?

Edward Wilson, CRO

No, there’s like no difference. I mean, it would seem like we’ve been putting extra capacity in for next summer into the U.K. So nothing to add to what you said there.

Michael O’Leary, CEO

In the provincial U.K., we've already experienced strong growth in Stansted, and we are increasing capacity in Birmingham, Bristol, Manchester, Liverpool, and we have a new base opening in Belfast as well. Despite the challenges of Brexit, this market continues to show significant growth. Recently, there has been a considerable reduction in capacity with the exit of Thomas Cook, Fly BE, and easyJet reducing their capacity, leading to a notable decrease in short-haul capacity. Next question, please?

Operator, Operator

We have one further question in the queue. That's from the line of Duane Pfennigwerth at Evercore ISI.

Duane Pfennigwerth, Analyst

Just one for me. Could you talk a little bit, does the MAX situation change your thinking about the pace of retirements or actually going into the market and acquiring new 737s? Are you investing in maintenance overhauls on aircraft that you’d otherwise be kissing goodbye?

Michael O’Leary, CEO

No. The answer to the question is that we are experiencing significant growth at the moment. We had initially planned to use some of our Gamechanger deliveries to retire older aircraft. However, we have so many growth opportunities that we are growing faster than we anticipated, and thus we are not retiring older aircraft. For instance, one of the aircraft we returned from an operating lease two years ago has now been offered back to us at a substantial discount. We will selectively add aircraft in small numbers where 737 NGs are available and where it makes financial sense to do so. However, we are not actively looking at the secondhand market, as there currently isn't much available, with many of those aircraft being converted for cargo use. We have around 150 to 160 aircraft deliveries scheduled from Boeing over the next three years, providing ample growth. These aircraft are efficient, offering 4% more seating while consuming 16% less fuel. They are not only more cost-effective to operate but also environmentally friendlier. We plan to focus on these aircraft. By 2024 or 2025, we hope to return to discussions with Boeing regarding a new aircraft deal, but Boeing needs to resolve their manufacturing issues first and fulfill their current commitments before we can negotiate new orders confidently. In the meantime, Airbus is capturing a significant portion of Boeing's market share, converting many Boeing customers in regions like China and the U.K. For example, Jet2 has shifted from Boeing to Airbus. I believe that once Boeing addresses its production challenges, they will seek to regain market share, and we will be ready to collaborate with them, but only if the pricing is favorable for our growth, as Boeing's principles in Europe dictate. Any other questions before we wrap it up?

Operator, Operator

No, that was the final question.

Michael O’Leary, CEO

Okay. Neil, I’m going to be wrapping up. Why don’t you give us a couple of closing thoughts on balance sheet, cash flows, pay down of debt and then I might ask Eddie Wilson to give us a couple of closing thoughts on summer 2023.

Neil Sorahan, CFO

Okay. On the balance sheet itself, as I previously said, it's performed pretty well. We recovered quite significantly, but we do have two big years of CapEx ahead of us. While we spent €900 million in the first half of this year, we do have a €2.3 billion CapEx program in the current year. That will drop to somewhere in the region about €2.1 million to €2.2 billion next year. The strength of the balance sheet is core enabling us to pay at a time when interest rates are rising to pay off maturing debt and to form their selves from our own resources. This is usually important. It's also giving us the ability to have a rock-solid BBB rating, which enables us to put hedging in place for both the dollar and for the fuel, particularly on the CapEx, where we're extremely well hedged out at €1.24 at the end of the Boeing order book, which means we're locking in aircraft in euro terms at very attractive levels which enables us to grow over the next number of years. Cost in great shape, as Michael has already said as well, unit costs having come down quite significantly in the first half, guiding full-year unit costs of €31 ex-fuel and then we hope to start seeing some reductions as we take more Gamechangers in fleet over the next couple of years.

Michael O’Leary, CEO

Thanks, Neil. Eddie, maybe if you could have last thoughts on summer '23 and kind of generally commercial development?

Edward Wilson, CRO

I think I'll start by discussing the operation, Michael. From our experiences this summer, we need to be prepared for next summer as well. This summer presented challenges with air traffic control, but we're ahead of the competition. We must ensure that we are fully prepared, especially with third-party providers, for next summer to deliver on our commitments. I always want to assure that we have the right people, airports, and aircraft, and while we are encountering some temporary issues with the aircraft, we believe these will resolve. We noticed that our fares, especially in the strong Q2, are positioned well. The capacity we've hedged is significant, especially given that places like Germany saw market shrinkage of about 25% in July and August. We anticipate those gaps will be filled by Nexon, which should lead to higher fares. It's crucial to get the operation right and have all our partners at the airports for the next summer. We won't be able to sell air traffic control by next year, but the environment regarding capacity reductions in the market should bode well for fares in December 2023.

Michael O’Leary, CEO

Thanks, Eddie. I just want to share one final thought about cooperation. We have made a strong recovery and had a very good first half of the year. However, we are still forecasting a loss for the second half, anticipating up to €200 million in losses between Q3 and Q4. The absence of Easter will impact Q4, and it could worsen if there are any adverse developments; we faced significant risks last year with COVID in November and the Ukraine invasion in February. This recovery is strong but delicate and could falter. If it holds, I am reasonably optimistic about a robust summer in 2023. Our top priority will be to restore pay for our employees and recruit a few thousand pilots and cabin crew to support summer growth. Following that, we will focus on using cash to reduce our €1.6 billion debt next summer. We will also need an additional €2 billion to continue funding our capital expenditures. These are challenging times, but I believe the management team at Ryanair, along with our unions and staff, has shown resilience and flexibility throughout COVID, positioning us well for strong growth as we emerge. If a recession occurs, it could actually benefit our business. We are likely to grow significantly even during a recession compared to other European airlines due to the widening cost and fare gap we have over them. I want to thank everyone who joined this morning. We have extensive roadshows happening all week in the U.K., Europe, and the U.S. If anyone would like to schedule a meeting or a one-on-one, please reach out to Davy's or Citi, and we will be happy to accommodate. In the meantime, I hope to see everyone individually throughout the week. If not, feel free to visit Dublin in November or December to help boost our load factor. Thank you very much, everyone. It was great to speak with you. Take care. Goodbye.

Operator, Operator

This now concludes the conference. Thank you all very much for attending. You can now disconnect your lines.